They give an investor the right to buy or sell the underlying stock index for a defined time period.
[1] Because index options are based on a large basket of stocks, investors are able to gain exposure to the market as a whole and take advantage of diversification.
Options on stock indexes are similar to exchange-traded funds (ETFs), the difference being that ETF values change throughout the day whereas the value on stock index options change at the end of each trading day.
If an index option is exercised before the close of the market, the buyer of the option will in- or out-of-the-money for an additional amount equal to the difference between the closing price and the exercise price.
If the market closes above the intra-day exercise price, then the option will accrue an additional loss, and if the market closes below the intra-day exercise price, the option will accrue an additional gain.